Name That Trade – $NKE: Swoosh?

by CC September 23, 2015 12:12 pm • Commentary

Event: Nike (NKE) is scheduled to report is fiscal Q1 earnings tomorrow after the close. The options market is implying about a 4.3% one day move on Friday, which is shy of its 4 qtr average of about 5%.  With the stock at $116, the Sept25th weekly 116 straddle (the call premium plus the put premium) is offered at $4.85. If you bought that, and thus the implied move, you would need a rally above $120.85, or below $111.15 to make money.

Price Action / Technicals: NKE is up 20% on the year, only 1% away from its 52 week and all time high made on August 5th, and up 22% from its August 24th flash-crash low.

The year to date chart of NKE shows the stock now once again threatening a breakout after the massive V reversal that took place in August, with $105 fairly obvious support on the downside:

[caption id="attachment_57061" align="aligncenter" width="600"]NKE ytd chart from Bloomberg NKE ytd chart from Bloomberg[/caption]

Vol SnapShot;  short dated options prices are above the levels prior to the last couple reports with 30 day at the money implied vol at 28%. That should come into the low 20s following the print:

[caption id="attachment_57062" align="aligncenter" width="600"]from Bloomberg from Bloomberg[/caption]

Last week we highlighted some unusual options activity in the stock (here), which our best guess was at the very least defensive, and possibly bearish, from Sept 14th:

Put options in NKE are active today, trading 4x average daily volume with most coming in one three legged trade.  When the stock was $111.71 it looked like a trader sold to close 9400 Oct 105 puts at $1.71 and bought to open 6300 of the Oct 30th weekly expiration 104/95 put spread for $1.18.


In this trade the Oct 105 puts (closing), traded closer to the offer than the bid, that suggests the options were bought. But in this case the closing leg is attached to an opening downside put spread.  The put spread looks bought, and it doesn’t make any sense for a trader to close a short put position and replace it with a long put spread. So we are assuming that a trader is rolling out a bearish put position (possibly a hedge, or an outright bearish play).

Also, selling the Oct 30th 104/95 put spread, $9 wide at $1.18 isn’t great risk / reward when you consider the stock traded as low as $95 on August 24th and has their fiscal Q1 earnings on September 24th.  Potentially risking up to $7.82 to possibly at most make $1.18.

Our View:  NKE is one of those stocks that has always traded at a premium to the market and most of its peers given its premium brand and products, and likely always will. But the stock trading at 27.5x expected fiscal 2016 earnings growth of 13% is still eye-popping. That’s despite having half the growth of last year on decelerating sales growth from 10% in f2015 to 6% this year.  I would add though that the forward P/E is getting a little toppy at 15 year highs and approaching bubble levels:

[caption id="attachment_57063" align="aligncenter" width="545"]From Bloomberg From Bloomberg[/caption]

Headwinds??  Well, NKE gets nearly 60% of their sales from outside the U.S., with about 22% from emerging markets (10% from China alone), so the usual concerns about dollar strength and global growth don’t seem to be factored into current valuations.

It’s our view that NKE’s results and guidance could serve as a sort of inflection point in high valuation consumer discretionary stocks, just as Disney (DIS) did for media stocks back in early August. While we are a bit leery about making such a bet given the stock’s strong relative performance, I think its important to look back at the DIS breakdown from all time highs, and its inability to regain much ground. For the time being the DIS story is broken:

[caption id="attachment_57064" align="aligncenter" width="600"]DIS 1yr chart from Bloomberg DIS 1yr chart from Bloomberg[/caption]

We are not suggesting the same thing will happen, but if NKE were to miss, and give weak guidance as a result of the headwinds described above, the stock will be testing $100 again very soon, and possibly take the air out of some other crowded consumer discretionary stocks.

We are looking at trades that offer an attractive risk/reward playing for a re-test of the August lows in the coming weeks, but the best thing may be to wait for results and then either fade strength, or press weakness. For those looking to take a punt on a swoosh lower, with the stock at $115.35, the Sept 25th weekly 115 puts offered at $2.25 look dollar cheap, and obviously vice versa for the 115 calls. But we think the odds of an event move greater than what the options market is predicting is skewed to the downside, not the upside.